November Fund Flows Recap — The Shift Toward Passive Continues

With November behind us, we decided to conduct a deeper dive into fund flows, also known as asset flows or simply “flows,” over the month. Flows measure the net movement of cash into and out of investment vehicles, such as mutual funds and exchange-traded funds (ETF). Investors analyze flows to gain insight on investor demand and sentiment surrounding asset classes, sectors, and other classifications of markets.

In today's analysis, we will be examining flows across various asset classes, followed by a closer examination of individual Morningstar categories. Additionally, we will explore the disparities in flows between active and passive investments.

Asset Class Flows

During the one-month period ending on November 30, 2023, U.S. equities experienced the highest net inflow among asset classes, with a flow of almost $21.6 billion (represented by the light blue line). However, you’ll notice that the inflow into U.S. equity ETFs (orange) outweighed the outflow out of U.S. equity mutual funds (dark blue), highlighting investor appetite for passive U.S. equity investments. Not far behind U.S. equities are taxable bonds, which saw a $21.3 billion net flow, again showing ETF inflows meaningfully outweighing mutual fund outflows. It is worth noting that money market products were excluded from the below chart. If money market flows were included, it would significantly outpace all other asset classes in terms of flows, with a net $184.6 billion monthly inflow — not surprising given the yields on short-term interest rates.

Continued Shift Out of Active into Passive

Trailing 1-Month Net Asset Flows Across Asset Classes (AUM, Billions $)

Source: LPL Research, Morningstar Direct 12/13/23

Disclosures: Indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.

Flows for the year-to-date period are not too dissimilar from the trailing one-month period, as ETFs continued to gather assets in U.S. equities and taxable bonds. While ETFs recorded a net inflow in U.S. equities, the outflow from U.S. equity mutual funds meaningfully outweighed the ETF inflow, resulting in a net negative flow for U.S. equities for the calendar year. In taxable bonds, mutual funds experienced a net inflow, in addition to the ETF inflow, resulting in taxable bonds seeing the largest net flow across asset classes year to date at $199 billion.

Morningstar Category Flows

When looking at Morningstar categories, large blends experienced the largest net inflow over the trailing one-month period, nearly $23.4 billion. Following large blend was the high-yield bond category, experiencing an inflow of $12.8 billion. The next three categories, sequentially — intermediate-core bond, corporate bond, and long government bond — highlight investor sentiment towards longer-duration asset classes, with combined inflows of $16.7 billion. From the other end of the spectrum, ultrashort bonds and short-term bonds witnessed the largest outflows of $17.9 billion and $15.9 billion, respectively, further emphasizing the move out of short-duration assets and into long.

Investors Favoring Long-Duration Assets Over Shorter

Trailing 1-Month Net Asset Flows Across Morningstar Categories (AUM, Billions $)

Source: LPL Research, Morningstar Direct 12/13/23

Disclosures: Indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.

The year-to-date period appears similar, with intermediate-core bonds gathering the most flows ($110.2 billion) followed by large blend ($95.5 billion) and long government ($51.2 billion). Another notable category was derivative income, which gained $22.4 billion in flows. Derivative income strategies have boomed in popularity given their ability to generate significant income through the use of a covered call-writing strategy, while also participating in the markets, albeit at a lower beta.

When comparing the latest LPL Research Strategic and Tactical Asset Allocation Committee (STAAC) views with the November (and year-to-date) flows data, there are some similarities. The top asset class by inflows is U.S. equities, with large cap blended equities outpacing their mid-and small cap peers. The STAAC maintains an overweight to large cap equities over mid-and small-caps, given continued economic uncertainty and positive technical trends in the asset class. Additionally, November flows highlight investor sentiment for higher-duration asset classes. While the STAAC maintains neutral duration, the Committee favors fixed income broadly over cash, as the risk-return trade-off is attractive relative to history.